IMF Executive Board Concludes 2010 Article IV Consultation with India

Public Information Notice (PIN) No. 11/2
January 5, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 22, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with India.1


India’s growth is among the highest in the world. Since mid-2009 the pace of India’s recovery—led by domestic demand, especially infrastructure investment—has been strong. Monetary and fiscal policies remain accommodative: real interest rates are low and although there has been some fiscal consolidation, the fiscal deficit remains high. With little slack in the economy, the ongoing exit from the policy stimulus introduced during the crisis, and structural factors affecting food prices, inflation measures are in the 8½ to 10½ percent range. Financial conditions are comfortable, and capital inflows have been strong.

India’s economy is projected to grow by 8¾ percent in real terms in 2010/11, moderating to about 8 percent the following year. Following last year’s drought, this year’s growth is already benefiting from the rebound in agriculture and the pickup in private consumption as employment prospects have improved and disposable incomes continue to rise. Infrastructure is expected to remain an important growth driver and corporate investment is likely to accelerate, aided by conducive financing conditions and robust demand growth. India’s medium-term growth prospects remain strong. The economy is expected to continue to expand rapidly, supported by high investment and productivity gains.

Risks to growth are broadly balanced, with downside risks relating mainly to the global economy. Surging capital inflows could further spur investment, but could complicate macroeconomic management. Sustaining rapid growth over the medium term will depend on sustaining reforms to facilitate infrastructure investment—such as deepening the corporate bond market and lowering the cost of doing business—and improving social indicators while carrying out fiscal consolidation. Improving social outcomes and infrastructure are two key pillars of the government’s strategy to achieve rapid and inclusive growth.

Executive Board Assessment

Executive Directors commended the authorities for their economic stewardship which has helped India weather the crisis well. Growth is among the fastest growing in the world, social indicators are improving, and medium-term economic prospects are favorable. Risks stem mainly from weaker global growth. Near-term challenges confronting the authorities arise from elevated inflation, fiscal consolidation needs, and buoyant capital inflows, warranting careful calibration of macroeconomic policies and the diligent pursuit of ongoing reforms.

Directors commended the Reserve Bank of India’s (RBI) efforts to tighten monetary conditions. Noting that short-term real interest rates remain below historic norms and financing conditions have hardened only marginally, most Directors recommended further steps to bring the real repo rate clearly into positive territory. They welcomed the RBI’s moves to increase the frequency of policy reviews and publish more guidance on future actions. Most Directors considered that continuing to improve the CPI, including a new national CPI to be introduced in the future, and utilizing information from it in policymaking could increase the impact of monetary policy on inflation expectations. Directors also highlighted the role of structural reforms in containing food price inflation.

Directors welcomed the authorities’ commitment to fiscal consolidation, including their plans to streamline spending. The envisaged Goods and Services Tax and the new Direct Tax Code should increase tax efficiency. Given buoyant economic growth, and since future deficit targets could be more difficult to reach, most Directors saw merit in a further strengthening of the consolidation effort. Saving this year’s over performance in revenue and one-off receipts could help reconstitute fiscal space. More substantial current spending adjustment, mainly by further cutting subsidies and improving the targeting of spending, would help achieve social goals along with medium-term fiscal consolidation. A few Directors favored an appropriate balance between pacing the consolidation and sustaining growth by addressing the exigencies of infrastructure investment and social spending.

Directors observed that low yields in advanced economies and India’s favorable growth differentials could raise capital inflows above its absorptive capacity. While exchange rate flexibility would remain the first line of defense, reserve accumulation and macroprudential measures could be employed if strong inflows continue. Absorptive capacity could also be improved by deepening financial markets or by liberalizing foreign direct investment (FDI), consistent with India’s gradual approach to capital account liberalization.

Directors supported the authorities’ focus on strengthening financial stability, including efforts to strengthen macroprudential regulations to cool the residential real estate market and to ensure a regulatory level playing field across the financial industry. While India’s banking system is resilient and well capitalized, Directors noted that monitoring asset quality will remain important, particularly as prudential norms for infrastructure are eased. They commended the introduction of the RBI’s Financial Stability Report, the announced review of financial laws, and the creation of the Financial Stability and Development Council, and looked forward to the forthcoming Financial Sector Assessment Program.

Directors welcomed the emphasis on investment in infrastructure and human capital.

They supported the measures taken to increase the availability of long-term finance for infrastructure, especially moves to develop the corporate bond market, while noting that in the short run foreign savings also would be needed. Directors supported the authorities’ reform efforts in areas such as land acquisition and government clearances, while also stressing the importance of strong accountability and transparency over large infrastructure projects.

India: Selected Economic Indicators, 2006/07–2010/11 1/
    2006/07   2007/08   2008/09   2009/10 2010/11
                Prel. Proj.

Growth (y/y percent change)

Real GDP (at factor cost)

9.7   9.2   6.7   7.4 8.8

Industrial production

11.5   8.5   6.7   10.5 ...

Prices (y/y percent change, average)

Wholesale prices (2004/05 weights)

5.5   4.6   8.3   3.5 8.5

Wholesale prices (2004/05 weights, end of period)

6.8   7.7   1.5   10.2 6.5

Consumer prices - industrial workers (2001 weights)

6.7   6.2   9.1   12.7 10.8

Saving and investment (percent of GDP)

Gross saving 2/

34.5   36.4   33.9   32.1 34.4

Gross investment 2/

35.5   37.7   36.2   35.0 37.7

Fiscal position (percent of GDP) 3/

Central government deficit

-4.3   -3.1   -7.5   -6.8 -6.6

General government deficit

-6.1   -4.4   -10.8   -10.4 -9.6

General government debt 4/

77.7   75.0   75.0   76.8 75.0

Money and credit (y/y percent change, end-period) 5/

Broad money

21.3   21.4   19.3   16.8 17.7

Credit to commercial sector

25.7   21.1   16.9   15.9 20.2

Financial indicators (percent, end-period) 6/

91-day treasury bill yield

8.0   7.2   5.0   4.4 6.9

10-year government bond yield

8.0   7.9   7.0   7.8 8.1

Stock market (y/y percent change, end-period)

15.9   19.7   -37.9   80.5 15.3

External trade 7/

Merchandise exports (US$ billions)

128.9   166.2   189.0   182.2 229.4

   y/y percent change

22.6   28.9   13.7   -3.6 25.9

Merchandise imports (US$ billions)

190.7   257.6   307.7   299.5 380.6

   y/y percent change

21.4   35.1   19.4   -2.7 27.1

Balance of payments (US$ billions)

Current account balance

-9.6   -15.7   -28.7   -38.4 -49.9

   (in percent of GDP)

-1.0   -1.3   -2.4   -2.9 -3.3

Foreign direct investment, net

7.7   15.9   17.5   19.7 23.6

Portfolio investment, net (equity and debt)

7.1   27.4   -14.0   32.4 31.8

Overall balance

36.6   92.2   -20.1   13.4 28.6

External indicators

Gross reserves (in billions of U.S. dollars, end-period)

199.2   309.7   252.0   279.1 307.7

   (In months of imports) 8/ 9/

7.7   10.3   8.4   7.5 7.3

External debt (percent of GDP, end-period)

18.2   18.3   19.1   19.5 19.2

   Of which: short-term debt 9/

3.7   6.8   7.5   8.0 8.2

Ratio of gross reserves to short-term debt (end-period) 9/

5.7   3.7   2.8   2.7 2.5

Gross reserves to broad money (percent; end-period)

26.2   30.9   26.6   22.4

Debt service ratio 10/

4.9   5.3   5.2   5.0 5.1

Real effective exchange rate

   (y/y percent change, period average for annual data)

-1.7   7.3   -7.7   -0.5

Exchange rate (rupee/US$, end-period) 6/

43.5   40.1   50.7   45.0 45.9

Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; Bloomberg L.P.; World Development Indicators; and IMF staff estimates and projections.

1/ Data are for April-March fiscal years.

2/ Differs from official data, calculated with gross investment and current account. Gross investment includes errors and omissions.

3/ Divestment and license auction proceeds treated as below-the-line financing. Subsidy related bond issuance classified as expenditure.

4/ Includes combined domestic liabilities of the center and the states, inclusive of MSS bonds, and external debt at year-end exchange rates.

5/ For 2010/11, as of October 2010.

6/ For 2010/11, as of November 2010.

7/ On balance of payments basis.

8/ Imports of goods and services projected over the following twelve months.

9/ Short-term debt on residual maturity basis, including estimated short-term NRI deposits on residual maturity basis.

10/ In percent of current account receipts excluding grants.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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